Attorney general asked to investigate school bond deals

Borrowing through capital appreciation bonds is helping to pay for a 600-seat performing arts center at El Dorado High in Placentia. The expensive bonds, which delay payments for decades, were sold by Placentia-Yorba Linda Unified officials after voters approved Measure A in 2008. JEBB HARRIS, ORANGE COUNTY REGISTER

State Treasurer Bill Lockyer on Monday asked the California attorney general to investigate whether school officials are breaking the law by hiring banks and their political strategists to promote bond measures before voters.

Lockyer did not name the schools or banks involved in these deals. But some of the examples he describes in a letter to Attorney General Kamala Harris are the same as the Register found in place at Placentia-Yorba Linda Unified in a recent investigation.

His letter focuses on agreements under which districts provide underwriting firms exclusive contracts to sell bonds approved by voters in exchange for the firms providing pre-election, campaign-related services to districts.

The Register investigation detailed how Placentia-Yorba Linda hired a bank named George K. Baum & Co. before an election in 2008. Baum did political consulting for the district, and voters agreed that the district could issue $200 million in bonds to continue an ambitious building spree. School officials denied that they had hired the bank for political work on the bond campaign, but the Register found the firm's political strategists were extensively involved in getting the measure passed.

Under state law, it is illegal for school officials to use public money to hire political consultants to pass bond measures. But school districts across the state continue to have political strategists – paid by their banks or outside financial advisers – manage their bond election campaigns.

Baum has said it followed all laws and disclosure rules.

In recent years, Baum executives have traveled to dozens of California school districts offering similar deals. According to documents, the bank has offered help to the schools from its staff of political strategists and pollsters in putting a bond measure on the ballot and getting it passed. It has promised the schools that they will owe nothing if the bond measure fails.

Baum's agreements with Placentia-Yorba Linda and other districts also have given the bank wide latitude to design the debt with terms that favored its investor clients who wanted to buy school bonds. Some of those bonds have included terms so detrimental to the school districts that they will haunt taxpayers for decades.

For example, just one $22 million capital appreciation bond (CAB) borrowing by Placentia-Yorba-Linda in 2011 will cost taxpayers nearly 13 times that amount – $280 million – to pay back.

In his letter, Lockyer asked Harris for "a formal legal opinion ... regarding the conduct of some elected and appointed officials" and the financial firms working for those schools.

Lockyer specifically requested that the attorney general look at the legality of agreements where the schools award a contract to a bank to underwrite all the bonds in return for receiving pre-election campaign services.

"These arrangements raise substantive questions about whether school district officials have violated state law by using public funds for campaign services," Lockyer wrote.

Lockyer also asked Harris whether a bank providing political services to a bond campaign must report the value of that work as a donation on election-disclosure reports. In a review of the bond elections held by three school districts, the Register found that Baum employees did not report the value of their political services as an in-kind contribution on these state reports.

Lockyer’s request comes as he is supporting legislation to limit school districts’ issuance of high-cost CABs that saddle taxpayers with exorbitant debt-service payments. Many of those deals delay payments for decades and prohibit schools from paying off the bonds before they mature.

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